Attracting customers is a key business activity but it is also important to keep our clients coming back to do business with us. Repeat customers are easier to deal with than new ones since they already have past experiences with us.
But have you ever asked yourself, how much is this client really bringing into the business?
What is lifetime value?
Lifetime value is the total money that a customer brings to the business over a period of time or as long as they are still your customer. A simple formula for lifetime value is:
Lifetime value = average transaction spending x # of times a client does business with you
Let’s say a client spends an average of $100 with every transaction. This client will do business with your company 10 times before looking for other alternatives. If we use the formula we would have:
Lifetime value = $100 x 10
Lifetime value = $1000
Why is lifetime value important?
Lifetime value is important for you as a business owner because you can predict how much a client will bring into your business. By using the lifetime value formula, you can compute how much a client is worth. With that knowledge, you can then create programs to extend the lifetime of the client in your business.
For example, you can add a rewards system that would increase the number of times a client does business with your company from 10 to 12. Using the figures above, that would translate to an extra $200 dollars in sales. If the rewards program is rolled out for a hundred clients with the same increase in the number of transactions, then that would bring in an extra $20,000! Imagine if you only spent $5000 on the rewards program while bringing in $20,000. That would be 4 times the money you invested which is quite an earning.
Lifetime value is also a good indicator of the type of clients that you attract. If your clients have a lifetime of just a handful of transactions then you might want to consider targeting a better market. You should also check your business for reasons why your clients do not come back. We have an article on why customers leave. You can refer to that article for a better understanding of why customers look elsewhere to do business with.
Lifetime values and acquisition cost
Lifetime value also works hand in hand with acquisition cost in terms of attracting new clients. Spending $100 to acquire a client with a lifetime value of $1,000 is a worthwhile investment. So, when deciding whether to start a marketing campaign to attract clients, knowing the average lifetime value of a client would be key to making your decision. You can use the lifetime value and acquisition cost to predict if your marketing and advertising campaigns are good investments.
The lifetime value of a client is important as it is a good indicator of the quality of your client and how good your business is at keeping clients happy. As the Chinese would say: “it does not matter if the profit is small as long as the sales are plenty.” The Chinese traders got it right. Keep customers happy and see the lifetime value of your clients rise.
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